Industry: Firing of Groupon CEO May Just Delay the Inevitable

Groupon, once one of the fastest growing companies in the world, fired its founder and CEO Andrew Mason after reporting disappointing quarterly results this past week. In his letter to Groupon’s employees, Mason said his resignation would allow “the outside world to give you a second chance [and] the board is aligned behind the strategy we’ve shared over the last few months.”

Despite this dramatic step, the question remains as to how the company’s board intends to right this rapidly sinking ship and what model can be used to plug the hole that is threatening to take the Chicago-based company down.

Groupon began operations in 2008 by providing discounts to local retailers based on groups of consumers under the theory that the former would appreciate new customers while the latter would like the discounts.

This model was a success but, because it had low-entry costs, everyone and their uncle entered this market and, facing growing competition from companies such as Yelp and Living Social (which is backed by Amazon), Groupon expanded into e-commerce sales.

While initial growth was impressive, complaints from consumers and retailers, strong competition, high costs and other factors have hurt the company. It recently disclosed a 61 percent year-over-year decline in operating cash flows and 83 percent less free cash flow. Indeed, its net-loss of $81 million in the most recent quarter caused its stock to collapse 24 percent in just one day.

Mason’s firing was welcomed by investors – the stock rose 12 percent on Friday – but it doesn’t answer the question regarding the company’s future. While, Groupon has around $1.2 billion in net cash and that will give the new CEO some leeway, given its precipitous decline, these funds won’t give him/her much time.

The first step clearly has to be to rein in costs and that means layoffs; further actions, however, are more uncertain. Should the company leave low-performing markets? Should it continue with Groupon Goods and, if so, how can it improve its margins?

Groupon’s high performing markets do generate more revenue but they also have lower margins and strong competitors. Would implementing the leanest possible operational structure and signing exclusive marketing and sales deals with merchants help the company? Given the complaints noted above, can Groupon even sign such agreements?

Groupon has expanded into international markets but they require even more resources with limited returns – albeit, these returns may grow in the future. The question then is whether the company can afford these costs in the face of its dwindling financial condition.

The company’s other division, Groupon Goods generated $2 billion in annual revenue but also hurt income and cash flow because of low margins. Given the competition in this sector – Amazon and E-Bay are the two major competitors and both have better brand recognition and a stronger management structure – its almost impossible for Groupon to raise the margins without reducing costs or improving its supply chain. Can these be accomplished within a relatively short timeframe?

Finally, is this a viable industry for a non-diversified company? Groupon’s competitor Living Social, for example, can depend on Amazon but who can support Groupon; Google once expressed interest in purchasing the company but that is unlikely to happen now, at least not without a significant price discount.

With traditional daily deals losing favor and demand decreasing, I’d argue that Groupon’s stock is overvalued. This, however, does not mean the company is down for the count as its cash position is relatively strong and the Groupon Goods business is growing rapidly.

Whatever path is chosen, what is certain is that Groupon needs to reduce costs, change the industry’s impression of its capabilities and focus on becoming attractive for a suitor with deeper pockets and a varied base. Otherwise, there may be a fire sale at Groupon in the near future.